A Run Through of the M&A Landscape
In the first nine months of 2021, Australian deals totalled $332.7 billion, increasing more than six times than the previous nine months of 2020.
Bankers do not see signs of M&A deals slowing down as deals targeting Australian companies made up 20% of the region’s overall value, only second to China, after increasing five-fold from just 4% in the same period last year.
Despite the pandemic-induced lockdown and geopolitical frictions, M&A confidence is at an all-time high. Several factors are in play: pent-up demand from the pandemic last year, lucrative listed infrastructure and resources firms and low-cost infrastructure assets.
Retail and consumer services are also a trending sector for M&A transactions, which account for 60% of total transaction value in the public M&A deals. According to a report by the Gilbert and Tobin law firm, the Australian M&A scene has seen great success so far, mainly due to its confidence stemming from low-interest rates, taking interest and advantage of technological opportunities, and targeting businesses affected by the pandemic.
There has never been a better time than now to consider acquiring a high-value business and positioning yourself to prosper in a dynamic marketplace. M&A deals allow buyers to take advantage of economies of scale, have increased market share, and effectively compete in international markets, amongst other strategies. If you’d like revisit the general process of M&A, feel free to read our guide.
This guide provides a complete and thorough breakdown of the buy-side M&A process for buyers that require a step-by-step checklist before beginning their M&A journey.
Starting the Process
M&A advisory, one of the four primary services investment banks offer, can help you acquire or merge. However, due to the precise and rigorous nature of M&A, it is essential to work through the details with a specialised financial and corporate legal team.
Additionally, you should abide by the Australian regulatory frameworks that oversee M&A deals. For example, while it is not mandated for the merging parties to inform the Australian Competition and Consumer Commission (ACCC) of the imminent merger, it is an excellent measure to notify ACCC to avoid investigations that may extend the overall duration.
Defining Your Criteria
One of the essential steps to set the tone and the direction of your transaction is to develop a clear goal: an M&A strategy complements the overall corporate strategy and is consistent with the business model.
When buying a business, being clear of what you expect to gain helps define the purpose and reason of the transaction. The criteria are a limited set of parameters that the acquirer looks for in the target company – the company it hopes to acquire.
While no criteria will fit every company, you will use the set standards and requirements to evaluate and shortlist target companies. Ranking your criteria will highlight the most critical conditions to navigate the process more efficiently.
Specifying the criteria will allow a buyer to:
- Minimise the risk of acquiring a company that does not fit with your short-term and long-term goals
- Proactively look for companies rather than waiting for potential sellers
- Align your company’s management and shareholders for potential opportunities
It is crucial to create a tactical plan for your business in the next 5 to 10 years.
As the acquiring company, asking the right questions will help develop the criteria. The questions fall into three main groups: general, operating, and financial.
In the general questions category, some questions for the acquiring company to ask itself are:
- Do you want to maintain your management positions?
- If you are willing to accept less than 100% ownership of the target company, how much are you ready to take?
- How will you determine if your company culture is compatible with the target company?
For the operating category, some questions for the company to ask itself:
- What distribution channels does the ideal target company have?
- Which advanced technology does the perfect target company have?
- Which specific product or industry do you want to target or reach?
In the financial category, the company should ask itself:
- How will you finance the acquisition?
- What are the expected revenue and growth rates?
- Will you be able to pay an earn-out?
Defining Your List of Targets
Selecting relevant targets is the focal point of a successful M&A. A target list is a list of individuals, parties, and companies that you think are likely to have some interest in selling their business or a part of it. A comprehensive list of companies that include as many as possible that fit the pre-defined set of criteria is good. When evaluating whom to shortlist, consider which targets may gain an edge from selling their business.
Start by searching for high-value targets. Your advisor can also help you compile a list of companies by starting a formal search using their expertise and knowledge of the market. Discussing the list with your advisor is a challenging yet necessary exercise to gain clarity, prioritise your targets, and eliminate ones that do not meet your non-negotiables.
Making Contact with the Shortlist
Once you have finalised your M&A candidates, it is time to make initial contact. This can be done through solicited contact, where the target company is listed for sale or through unsolicited communication via an intermediary.
It is common for the identity of the listed company not to be established before signing a non-disclosure agreement with the company’s investment banker. Once signed, the investment banker will provide you with a Confidential Information Memorandum (CIM), a comprehensive document that conveys details about the business, the industry in which it operates, why it is a good investment opportunity, an overview of the management, and summary-level financial data.
Preliminary Valuation Considerations
Now that you have the memorandum, you should do thorough research and do your due diligence to clarify any concerns and questions you may have.
From your study and development of financial models, you should be able to discern the viability of the M&A and establish an initial estimate of its value. It is also the best time to identify any deal-breaking issues that can cause the abandonment of a potential investment. You can read our guide on valuing a business for a more detailed analysis on this process. Likewise, if you are looking to generate a pragmatic valuation of a business, you can use our valuation tool.
Early in the M&A journey, the valuation is preliminary. It is often highly dependent on the financial data provided by the target company, who can be hesitant to give comprehensively detailed financial statements, especially when they lack the confidence that the buyer can successfully close the deal. As a result, you may have to revise your valuation a few times as additional information from the target business is shared.
Kicking off the Negotiations
Now that you have your research, you should know what you are willing to pay and what the sell-side is hoping to achieve from the transaction. You should make an informed decision about the price and prepare to negotiate.
Before the commencement of negotiations, lawyers and advisors will draft two documents: a Letter of Intent (LOI) and a Purchase Agreement. You can make the initial offer through an LOI that includes the primary conditions of acquisition, while the Purchase Agreement is in a draft form that defines the acquisition’s specific terms. Once you complete the due diligence, the final conditions are finalised and agreed upon by both parties.
Due Diligence is Integral for Buy-side
This process commences after the acceptance of the LOI. Due diligence refers to the extensive scrutiny of all the information at hand, which is why accounting and law firms are engaged to conduct due diligence.
The financial team discerns the accuracy of financial statements, which may uncover opportunities to lower tax liabilities, all of which will prove helpful when the new management plans for consolidation.
On the other hand, the legal team reviews all legal documents from contracts to pending litigations for you to understand the target company’s binding agreements and legal-related exposure.
The analysis would guide you to answer these four crucial questions:
- Should you make this transaction?
- How much should you pay for the business?
- How should the acquisition be structured?
- How will you proceed with post-transaction accounting, operating, and legal issues?
Options to Secure Financing
Before finalising and closing the deal, you must provide the seller with proof that there is necessary capital and financing for the acquisition. There are many ways and sources to raise finances: bank loans, government grants for small businesses and startups, private investors, venture capital funds and seller financing.
Closing the Deal
The final contract for the sale of the business is the Purchase Agreement, detailing the date of the deal closing, the funding of the deal, and management of the company post-closing. Once the parties agree, they sign the document.
Subsequently, the buyer and seller work together on regulatory and shareholder approvals and press releases. Finally, the bank creates a funds flow analysis which shows how the money will be transferred from the buyer when the deal closes.
The buyer pays the seller at the closing, and the deal is complete.
In a technologically advanced, capitalist country with a stable economy, Australia’s M&A market plays a pivotal role in cultivating an economy for firms to grow in a competitive market driven by accelerated economic growth and activity.
Due to the abundance of capital in the corporate and private equity sectors, bankers predict that economic conditions will remain favourable with high levels of M&A activity for the next six to twelve months.
Moreover, due to Australia’s record-low interest rates, pent-up demand from the global lockdown in 2020, and significant cash reserves on balance sheets and in superannuation funds, there has never been a better time than now to strike an M&A deal to strategically position your business in the market.
If you require further support in your purchasing journey, feel free to contact our dedicated team.